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Newbie Expiration Day Question
- Thread starter mraln
- Start date
Alright, since I'm a newbie to the street in general I need to ask questions so that I can grow in my understanding. I hope that someone will be kind enough to answer my questions.
If there are 6 times as many in the money calls as puts being exercised, wouldn't it have the same effect as 6 times as many people buying the stock than selling thus creating a bullish effect?
Please correct me if I'm wrong about the technicality of options, but do the exercised calls buy from the open market? (with the option seller/writer making up the difference)
If the calls are not bought from the open market, how are they exercised?
Thanks in advance to whoever answers these questions.
If there are 6 times as many in the money calls as puts being exercised, wouldn't it have the same effect as 6 times as many people buying the stock than selling thus creating a bullish effect?
Please correct me if I'm wrong about the technicality of options, but do the exercised calls buy from the open market? (with the option seller/writer making up the difference)
If the calls are not bought from the open market, how are they exercised?
Thanks in advance to whoever answers these questions.
I'm not an options trader but -
Why do you think they have to be exercised?
They are often bought back or sold, so the only money required is the delta between the otion purchase/sale price (premium) and the sale/buyback price (premium). If they are exercised a large amount of capital is often required to exercise a call or a put. Why bother?
Options can be used for many things, like puts for portfolio insurance, and the puts just expire (worthless) like a term life insurance policy.
I think you need to learn about theta and volatility crush if I remember what I learned some years back.
Jack
Why do you think they have to be exercised?
They are often bought back or sold, so the only money required is the delta between the otion purchase/sale price (premium) and the sale/buyback price (premium). If they are exercised a large amount of capital is often required to exercise a call or a put. Why bother?
Options can be used for many things, like puts for portfolio insurance, and the puts just expire (worthless) like a term life insurance policy.
I think you need to learn about theta and volatility crush if I remember what I learned some years back.
Jack
Quote from JackR:
I'm not an options trader but -
Why do you think they have to be exercised?
They are often bought back or sold, so the only money required is the delta between the otion purchase/sale price (premium) and the sale/buyback price (premium). If they are exercised a large amount of capital is often required to exercise a call or a put. Why bother?
Options can be used for many things, like puts for portfolio insurance, and the puts just expire (worthless) like a term life insurance policy.
Jack
Well tomorrow is the March Options expiration date. You are right that it requires a large amount of capital. However, if in the money options are not exercised, the options become worthless and the people holding the options lose the premium that they paid.
Quote from mraln:
Alright, since I'm a newbie to the street in general I need to ask questions so that I can grow in my understanding. I hope that someone will be kind enough to answer my questions.
If there are 6 times as many in the money calls as puts being exercised, wouldn't it have the same effect as 6 times as many people buying the stock than selling thus creating a bullish effect?
Please correct me if I'm wrong about the technicality of options, but do the exercised calls buy from the open market? (with the option seller/writer making up the difference)
If the calls are not bought from the open market, how are they exercised?
Thanks in advance to whoever answers these questions.
You should remember that for every call that someone is long someone else is short. Institutional money tend to be short calls and puts while retail investors tend to be long calls and puts. If there are more calls than puts, that generally means that the big banks are short more calls than puts. Guess who has more money to push the underlying around.
ITM calls don't have to be exercised, they already are auto exercised by the broker. ITM calls are auto exercised when more then $0.25 for sure, and could be up to $0.05 ITM. Settlement takes after the market closes. As for early exercise, there are a number of factors to consider, but in your example about general exercise procedures they won't be any market influence.
Like someone else said, generally no effect*.
An example: If someone is short calls, they may have sold them against a long stock position. Someone may have bought calls as insurance against a short stock position. At expiration, the stock gets moved from the first party to the second, leaving both flat - no stock trades in the market.
* One effect that occurs some times is: if a stock is trading near a strike with a lot of open interest, and there is no reason for it to move significantly, it will sometimes tend to close very close to the strike price ("pin it"). For an explanation of why this happens, have a look at the "best of Cramer" articles on TheStreet.com (among, I'm sure, other places). There's also more about Monday morning hangovers that are observed in some circumstances where a stock makes a big, unexpected move into expiration.
An example: If someone is short calls, they may have sold them against a long stock position. Someone may have bought calls as insurance against a short stock position. At expiration, the stock gets moved from the first party to the second, leaving both flat - no stock trades in the market.
* One effect that occurs some times is: if a stock is trading near a strike with a lot of open interest, and there is no reason for it to move significantly, it will sometimes tend to close very close to the strike price ("pin it"). For an explanation of why this happens, have a look at the "best of Cramer" articles on TheStreet.com (among, I'm sure, other places). There's also more about Monday morning hangovers that are observed in some circumstances where a stock makes a big, unexpected move into expiration.